Excess Funds and Agency Problems: An Empirical Study of Incremental Cash Disbursements

Erik Lie

The Review of Financial Studies, 2000, vol. 13, issue 1, 219-47

Abstract: This study investigates the excess funds hypothesis using samples of special dividends, regular dividend increases, and self-tender offers. All three types of firms tend to have funds in excess of industry norms before the events. The excess funds are largely nonrecurring for special dividend and self-tender offer firms and recurring for regular dividend increase firms. The analysis of the stock price reaction suggests that large incremental disbursements mitigate the agency problem associated with excess funds. In particular, the stock price reaction is positively related to excess funds for self-tender offers and large special dividends, but not for regular dividend increases (which tend to be smaller) or small special dividends. Article published by Oxford University Press on behalf of the Society for Financial Studies in its journal, The Review of Financial Studies.

Date: 2000
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